Sectoral comebacks: Top themes to bet on this earnings season

Going into the earnings season, is pricing in a good YoY growth indicator? Is it important for the Indian markets to track it?

The demand trend continues to remain fairly strong. You will possibly see improvement in terms of the demand trajectory across the board as we have seen through the third quarter; and therefore, overall top line growth should be holding up across sectors. But, what is happening now is that the pace of earnings upgrades that we saw all through last year is slowing down and, therefore, when we go into FY23, while earnings expectations remain fairly healthy, one needs to watch out for is how the pace of earnings revisions work and if the pace of upgrades start to come down. Then the market movement will be determined largely by earnings growth and not by multiples which have re-rated all through last year.

Which are the sectors you would be bullish on? Last year’s great movers like metals, underperformers like pharma? Which are the sectors you would look forward to this result season?

Not just this result season, but over the next 12-18 month period, there are few key themes that we are looking at. The first thing is that over the last decade or so we have seen that the investment cycle has been lagging consumption. However, now we are at a crossroads and incrementally investment growth is likely to pick up. This would be driven by all three segments – public capex, private as well as household capex. Therefore, segments which are domestic cyclicals, for instance infrastructure, manufacturing, cement capital goods are a few sectors where we are positive on.

The second element is financials. Again, we have seen that over the last six months or so the sector has been weak and underperforming the markets. However, we do believe that large private banks are well placed and even though there is fear of disruption from fintechs. The capability of these banks to collaborate with fintechs and invest in technology has improved significantly. Capital positions are good and incrementally asset quality pressure should also start to abate. So private sector banks, specifically the large ones, this is a segment that we are positive on.

The third segment that we are looking at is the digital and the adoption of digital technology as a theme. This is something that, of course, has played out quite a bit in the last one year. However, we believe that digital transformation is here to stay and incrementally the benefits and opportunities because of that is likely to play out over the longer term so structurally we are positive on that theme as well.

Finally, on the export opportunity which is essentially the China-plus-one strategy where sectors such as chemicals for instance benefit.

How would you look at the telecom space? On one hand, the aggression for tariffs is going away, on the other a third significant player is slightly struggling to meet or is trying different ways to go ahead and do fund raise. What is the sense that you get about this sector?

Telecom as a sector is a classic example of consolidation, and that consolidation resulting in a three-player market. In the interim, some thought about whether it would be a three-player or a two-player market. While it will remain a three-player market for some time, what is clear is for the players to return back to profitability, price hike is something that would be the order of the day. Therefore, we do expect that while some price hikes have already been announced in the last year incrementally, going forward, players would possibly look at further price hikes which would aid profitability.

The other thing to watch out for in the sector would be how the subscriber market share really shifts, and if there is a shift across for some of the larger players in terms of subscriber market share, that also bodes well for some of the leaders in this particular segment. This is a segment where we do have some exposure – especially to some of the leading players – because of the consolidation theory really playing out in terms of better pricing power and that overtime hopefully leading to profitability also.

One sector, when we talk about manufacturing, has always been the auto pack; and one sector which is less spoken about is the auto ancillary pack. Do you think auto ancillary as a space is very interesting. We have recently seen a lot of auto ancillaries get rerated on the back of EVs and EV supply globally?

Yes. This is a space that is definitely very interesting. Of course, we have seen that there have been some challenges because of the supply chain issues and the chip shortages. However, incrementally we do believe that over the next few quarters some of these challenges should start to abate. Globally, as demand starts to recover from the OEM side and as you correctly mentioned with traction on the EV space, we do believe that there will be normalisation of growth rates for the auto ancillary space as well. Also, some of the Indian auto ancillary manufacturers who are well entrenched in the global supply chains of many of the OEMs will also stand to benefit. Therefore we are looking at companies which have strong execution abilities, which have the ability to also manage supply-chain; and therefore, as demand starts to pick up and all these bottlenecks start to ease out, Indian auto ancillary players should be fairly well placed in this current environment as well.

For the last 7-8 years, investors have mostly avoided spaces like real estate and aviation. But with such high economic growth, do you think that these are the sectors that would actually benefit?

Yes, so let me just first take the question on real estate. We do believe that there is a new cycle that is turning around – especially where residential is concerned. What we have seen in the last few years is because of the policy changes which have been very favourable. We have seen consolidation in the sector where the stronger players have grown stronger.

Secondly, where real estate is concerned clearly we have seen over the last few years there has been an improvement in affordability primarily because of low interest rates as well as wage growth and wage hikes that have taken place. And Covid in some way or the other has also hastened the need for owning larger properties or larger flats and houses and all of that has meant that there is a clear turnaround that we are seeing in terms of demand where residential real estate is concerned and commercial will possibly follow but with a lag.

So, at this point in time, we are fairly positive on the real estate cycle and also the allied sectors which benefit from improvement in real estate which includes the entire home building pack of cement, tiles, pipes, ceramics etc.

When it comes to aviation, this is a sector which has seen significant amount of consolidation. However, given the kind of dynamics and consumer behaviour that is prevalent in the sector, it is unlikely that despite market share being skewed significantly you will see price hikes or pricing power. Therefore the focus goes on players which have the ability to manage costs and which are efficient cost players therefore those are the kind of segments that we are looking at and players which are able to manage their costs much better so that is what we are looking at on the aviation side as well.